Tax saving opportunities
It’s time to identify, plan for and potentially mitigate your tax burdens
While the Chancellor of the Exchequer, Rishi Sunak, is looking to reduce the tax gap, there are nonetheless still opportunities to review your financial arrangements for saving tax throughout the tax year. Taking action now will give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions before the end of the 2020/21 tax year on 5 April.
At the same time, you should be considering whether there are any planning opportunities that you could explore either for this tax year or for your long-term future.
Five things to consider before the end of the tax year
The end of the current financial tax year is fast approaching, which means now could be a good time to review your finances and make sure that you’ve taken advantage of all of the tax planning opportunities available to you. We’ve listed five things you could consider before the end of the tax year.
1. Maximise tax relief on your pension contributions by using all of your annual allowance
Pensions are a tax-efficient way to save for your longer-term future. The annual allowance for 2020/21 is £40,000, but you can also use surplus allowance from the previous three tax years. Your annual allowance may be restricted to a maximum of £4,000 where your taxable income plus employer pension contributions exceeds £240,000, and your net income exceeds £200,000.
For every £80 paid in, your pension provider can claim another £20 in tax relief from the government, so that a £100 contribution actually costs you just £80. Then, if you are a higher rate (40%) or additional rate 45%) taxpayer you can potentially claim up to an additional £20 or £25 respectively, making the effective cost of a £100 contribution for you as little as £60 or £55.
There’s a key difference in how higher and additional rate taxpayers claim tax relief, however. While 20% is reclaimed at source by your pension provider, which works for basic rate taxpayers. If you are a higher rate taxpayer, you can reclaim the extra through a self-assessment or by contacting the HMRC. The additional rate taxpayers will have to claim the extra relief through their tax return.
2. Take advantage of the Individual Savings Account (ISA) investment limit to generate tax-free income and capital gains
An ISA is a tax-efficient savings or investment account that allows you to put your ISA allowance to work and maximise the potential returns you make on your money, by shielding it from Income Tax, tax on dividends and Capital Gains Tax. The maximum annual amount that can be invested in ISAs is £20,000 (2020/21). You can allocate the entire amount into a Cash ISA, a Stocks & Shares ISA, an Innovative Finance ISA or any combination of the three. There is also a Lifetime ISA (see point 3).
3. Start planning ahead for a first property or retirement
A Lifetime ISA (LISA) is a dual-purpose ISA, designed to help those saving for a first home or retirement. If you are aged 18 to 39, you can open a Lifetime ISA and save up to £4,000 tax-efficiently each year up to and including the day before your 50th birthday. The government will pay a 25% bonus on your contributions, up to a maximum of £1,000 a year. Your Lifetime ISA allowance forms part of your overall £20,000 annual ISA allowance. You can withdraw your savings from age 60 onwards, if not used to buy a home before then. A penalty of 20% (returns to 25% on 6 April 2021) may be applied if you withdraw from your LISA for other purposes. However, it is also possible to withdraw money from LISA if a person is terminally ill, with less than 12 months to live.
4. Contribute up to £9,000 into a child’s Junior Individual Savings Account (JISA)
A Junior ISA is a long-term savings account set up by a parent or guardian with a Junior ISA provider, specifically for their child’s future. Only the child can access the money, and only once they turn 18. There are two types available – a Cash Junior ISA and a Stocks & Shares Junior ISA.
The current annual subscription limit for Junior ISAs is £9,000 for the 2020/21 tax year. The fund builds up free of tax on investment income and capital gains until your child reaches 18, when the funds can either be withdrawn or rolled over into an adult ISA.
5. Plan your capital gains to make best use of any capital losses
The £12,300 (2020/21) allowance is a ‘use it or lose it’ allowance. You can’t carry it forward to future years. But remember that each individual has their own allowance, so a married couple can potentially realise gains of £24,600 this tax year without incurring any tax liability. If appropriate you could transfer assets between your spouse or registered civil partner tax-free, so it might make sense to consider transferring holdings to a spouse in a lower tax bracket or one who hasn’t used their allowance.
Gains and losses realised in the same tax year have to be offset against each other, and this will reduce the amount of gain that is subject to tax. If your losses exceed your gains, you could carry them forward to offset against gains in the future, provided you have registered those losses with HMRC.
Personal circumstances differ and not all of the above is applicable/relevant to every client, the information above is general in nature and It is always a good idea to speak to a financial adviser before making any decisions. Further information can also be found on the gov.uk website.